College Savings 101

By Diane Schlindwein

October 17, 2008 5 min read

COLLEGE SAVINGS 101

Navigating the complexities of higher education costs

Diane Schlindwein

Creators News Service

Chances are when you were rocking your fussy newborn to sleep, college expenses were just about the last thing on your mind.

Suddenly, that child is growing up, and maybe more children have come along. All the while, the rising costs of college is what's keeping you up at night.

Your worries are justified. According to CNNMoney.com, the cost of higher education is rising even faster than inflation. Your 4-year-old may face college bills of more than $200,000. In fact, today's students -- and their parents -- are already enduring rising college costs: The average college tuition and fees per year are just over $6,000 for public universities and almost $24,000 for private universities.

Obviously, the sooner you start preparing, the better. But if you haven't begun saving, you are not alone. Only 44 percent of parents interviewed by Futuretrust, a college savings program, said they had put aside money for their child's education. And only half of those surveyed understood how a state-sponsored 529 plan worked.

"There are a lot of opportunities or alternatives [for saving] out there, and depending on individual needs, people can pick the alternative that will serve them best," said Mike Dunlap, a financial advisor for Wachovia Securities, LLC.

Building the assets to fund a child's college education is a challenge, but you may be able to meet it by contributing to a 529 college savings plan. They were made possible by federal legislation, but are implemented at the state or institution level, Dunlap explained. Nearly all states have approved or adopted these qualified assistance programs.

There are two types of 529 plans. They work much like a 401(k) or IRA by investing your contributions in mutual funds or similar investments. Prepaid plans allow you to prepay all or part of the costs of an in-state public college education. They may also be converted for use at a private or out-of-state college. Meanwhile, the independent plan is a separate prepaid plan for private colleges.

Most states allow nonresidents to participate in their specific plans, although the tax benefits may be better for residents. For example, according to savingforcollege.com, you can be a California resident, invest in a Vermont plan and send your child to college in North Carolina.

The beneficiary of the 529 plan can use the tax-advantaged account balances at any participating accredited postsecondary school in the United States -- or even some schools that are abroad -- for tuition, books, supplies and even room and board. The owner retains control of the assets and can change beneficiaries within the family of the original beneficiary at any time and there is no penalty involved.

Other ways to save include a Coverdell Education Savings Account, custodial accounts and taxable accounts. Qualified Coverdell ESA distributions are not subject to state and local taxation in most states.

Of course, while you are busy saving for your children's education, it's important to start teaching them how to be financially responsible. Even the youngest children have some idea about how their parents gain access to money. They know money doesn't grow on trees. Instead, it pops out of the ATM machine.

While your kids are growing up, explain to them how parents work to earn money to pay for housing, food and toys. Give them an allowance. Guide them in spending decisions. Open a savings account.

At about age 16, have them open a simple first checking account -- sans the overdraft protection. That way, if they bounce a check or misuse a debit card they'll understand the importance of balancing a checking account. Finally, by the time your college-bound student gets his or her first credit card, explain to them that credit is a privilege, not a right.

The important thing is to begin teaching children about money early on and to keep instructing them as they get older. That way by the time they reach early adulthood -- and are on the way to enjoying the education you've helped fund -- they'll be fiscally responsible individuals.

EDITOR'S NOTE: Wachovia was purchased by Citigroup on Sept. 29, 2008.

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